Eli Lilly to acquire Novartis unit for $5.4bn

June 2014 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

June 2014 Issue

Eli Lilly and Co announced in April that it had agreed to acquire the animal health unit of Swiss drug manufacturer Novartis AG for $5.4bn. The company will fund the all cash deal by utilising around $3.4bn of existing cash on hand and taking on loans of approximately $2bn.

According to a statement publicising the deal, the transaction is expected to close by the end of Q1 2015, subject to antitrust clearance in the US and abroad, and other customary closing conditions.

The deal will see Lilly acquire all outstanding assets of Novartis Animal Health and the company will use the acquisition to strengthen and diversify its own existing animal health business, Elanco. Following completion of the deal, Elanco, based in Greenfield, Indiana, will become the world’s second largest animal health company behind Zoetis Inc.

The acquisition of Novartis will provide a healthy boost to Lilly’s overall sales. Indeed, in 2013 Elanco reported sales of $2.2bn, and Novartis Animal Health generated $1.1bn in sales over the same period. The deal for Novartis Animal Health will be the second largest ever carried out by Lilly, following the company’s $6.5bn purchase of ImClone Systems in 2008.

The acquired Novartis unit has a strong global presence, with operations across approximately 40 countries and around 3000 employees. Lilly will also acquire all of Novartis Animal Health’s nine manufacturing sites, and six research and development facilities, as well as an extensive portfolio of around 600 current products including popular veterinary drugs Atopica, Deramaxx and Sentinel. The company’s approximately 40 development projects will also be part of the deal.

Once the transaction has been completed, Indianapolis-based Lilly hopes to improve efficiencies and reduce costs across both Elanco and the former Novartis unit. The company expects to achieve estimated cost savings of approximately $200m per year within three years of deal closing. Savings on that scale would equate to over 10 percent of the operating expenses from the combined animal health businesses, annually. Lilly also expects the purchase to contribute to the company’s profit on a cash basis from 2016 onwards, excluding integration costs.

On announcing the deal, John Lechleiter, Eli Lilly’s chairman, president and CEO, said “Animal health continues to represent an attractive growth opportunity for Lilly. We intend to keep Elanco and to take advantage of the substantial synergies between our animal health and human health businesses. Significant investments in our animal health business in recent years have enabled Elanco to double its revenue since 2008, leading the industry in growth. Global trends suggest continued sustained demand for animal health products in the years ahead.”

The sale of the animal health unit is part of a wider reorganisation at Novartis and a resurgence of M&A activity in the pharmaceutical industry. In April, the company announced it will increase its focus on cancer treatments by purchasing certain assets of GlaxoSmithKline plc (GSK). According to a statement released by the firm, Novartis agreed to acquire a number of cancer drugs from GSK in a deal worth approximately $16bn. Meanwhile, Novartis agreed to sell the majority of the company’s vaccines division to GSK for $7.1bn. “The transactions mark a transformational moment for Novartis. They focus the company on leading businesses with innovation power and global scale,” said Novartis CEO Joseph Jimenez. “We believe the divestment of our smaller Vaccines and Animal Health Divisions will enable us to realise immediate value from these businesses for our shareholders, and those divisions will benefit from being part of large, global businesses that are also leaders in their segments. Patients will benefit from even higher levels of innovation that this focus may afford. Looking ahead, this positions Novartis well for future health care industry dynamics.”